IFRS Global Ofce

IFRIC 12 Service concession

arrangementsA pocket practical guide

Foreword

IFRIC 12 Service Concession Arrangements is an Interpretation issued by the IFRS Interpretations

Committee (formerly IFRIC) that may have a very signicant impact on the nancial reporting of anycompany that enters into a concession arrangement with government. Although it is a relatively shortInterpretation, its application to the various types of concession arrangement that exist can be complex.Some would argue that the topic would have justied a full standard.This Interpretation was extensively debated and was nally published on 30 November 2006 with theobjective of decreasing the diversity of existing accounting practice for service concession arrangements.In fact, no specic IFRS recognition and measurement guidance previously existed for these types ofarrangement.The illustrative examples of IFRIC 12 are relatively straightforward and may not address the complexarrangements that are often encountered in practice. Therefore, application of this Interpretation may bechallenging and will often require a signicant amount of judgement.In IFRIC 12 Service Concession Arrangements A pocket practical guide, you will nd an analysis ofthe requirements of IFRIC 12 and practical guidance with examples that address some of the morecomplex issues around service concession arrangements. This Guide provides guidance on scope, thedetermination of the accounting model, specic characteristics of concessions that are common (takeor-pay arrangements, capacity availability, etc.) and much more. For a full list of the examples provided,refer to the Appendix of this Guide.This Guide is intended to serve as an illustrative tool for the reader in the application of theInterpretation. However, it does not address all possible fact patterns or industry-specic issues. It isimportant to remember that as more entities move towards adopting IFRIC 12 (2010 was the rstmandatory year of adoption in the EU), additional issues or areas that are problematic in practicemay arise and other matters may need to be considered. Readers are encouraged to consult with aprofessional advisor to discuss specic issues, questions or concerns.

Text in this Guide is highlighted differently to reect whether it represents ofcial or interpretativematerial. Accordingly: requirements drawn from ofcial IASB material are shown in unshaded text; and interpretative material supplementing the IASB guidance is highlighted by blue shading.We hope that you will nd this guide useful in applying IFRIC 12. You can keep up-to-date on future IFRSand IASB developments via our IAS Plus Website at www.iasplus.com. We hope that IAS Plus, this guide,as well as other Deloitte publications will continue to assist you in navigating the ever-changing IFRSlandscape.Javier ParadaLeader of the IFRIC 12Expert Advisory PanelDeloitte Touche Tohmatsu Limited

3.2 Determining the nature of the operator's asset

4. Financial asset model

5. Intangible asset model

8. Upgrade of existing infrastructure or new infrastructure

10. Arrangements that do not give rise to construction or upgrade services

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11. Items provided to the operator by the grantor

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12. Disclosures about service concession arrangements

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13. Effective date and transition

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Appendix List of the examples included

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1. Introduction

1.1 BackgroundIn November 2006, the IASB published IFRIC 12 Service Concession Arrangements. Service concessionarrangements are arrangements whereby a government or other body ('the grantor') grants contracts forthe supply of public services, such as roads, energy distribution, prisons, or hospitals, to a private sectorentity ('the operator'). This is often referred to as a 'public-to-private' arrangement.A typical type of public-to-private arrangement that would generally fall within the scope of theInterpretation is a 'build-operate-transfer' arrangement. In this type of arrangement, an operatorconstructs the infrastructure that will be used to provide the public service and operates and maintainsthat infrastructure for a specied period of time. The operator is paid for the services over the period ofthe arrangement. A contract sets out performance standards, pricing mechanisms, and arrangements forarbitrating disputes. [IFRIC 12:2] In some cases, the operator may upgrade the existing infrastructure.Some common features of service concession arrangements are described below.[IFRIC 12:3] The grantor is a public sector entity, including a governmental body, or a private sector entity to whichthe responsibility for the service has been devolved. The operator is responsible for at least some of the management of the infrastructure and related servicesand does not merely act as an agent on behalf of the grantor. The contract sets the initial prices to be levied by the operator and regulates price revisions over theperiod of the service arrangement. The operator is obliged to hand over the infrastructure to the grantor in a specied condition at the endof the period of the arrangement, for little or no incremental consideration irrespective of which partyinitially nanced it.For a public service obligation to exist, the services offered do not have to be made available to allmembers of the public. Rather, the services need to be available to benet members of the public. Forexample, prisons only accommodate those individuals required to be incarcerated by law, and cannotbe accessed by members of the public seeking accommodation. However, prisons would still beconsidered to provide services to the public.

There are many different types of concession arrangements that are often specic to each jurisdiction,or even in each municipality. Therefore, each arrangement should be analysed to determine theappropriate accounting based on the individual facts and circumstances.

1.2 Summary of key requirements

The following table provides an overview of the key requirements of IFRIC 12.Issue

Key requirement of IFRIC 12

Operators rights over the

infrastructure assets

The infrastructure assets are not recognised as the property, plant or

Revenue is recognised and measured in accordance with IAS 11 (for

The consideration received by the operator is recognised at fair value.

Consideration may result in the recognition of a nancial asset or anintangible asset. The operator recognises a nancial asset if it has an unconditionalcontractual right to receive cash or another nancial asset from or atthe direction of the grantor in return for constructing or upgradingthe public sector asset. The operator recognises an intangible asset if it receives only a rightto charge for the use of the public sector asset that it constructs orupgrades. IFRIC 12 allows for the possibility that both types of considerationmay exist within a single contract. For example, to the extent thatthe grantor has given to the operator an unconditional guarantee ofminimum payments for the construction, the operator recognises anancial asset. The operator may also recognise an intangible assetrepresenting the right to charge users of the public service that is inaddition to the minimum guaranteed payments.

Issue

Key requirement of IFRIC 12

Operators contractualobligations to maintain/restore the infrastructureto a specied level ofserviceability

Contractual obligations to maintain or restore infrastructure, except

for any upgrade element, should be recognised and measured inaccordance with IAS 37, i.e. at the best estimate of the expenditurethat would be required to settle the present obligation at the balancesheet date.

Borrowing costs incurred by

the operator

Borrowing costs incurred by the operator that are attributable to the

arrangement are recognised as an expense in the period incurredunless the operator has a contractual right to charge users of thepublic service (intangible asset model). In this case borrowing costsattributable to the arrangement should be capitalised during theconstruction phase of the arrangement in accordance with IAS 23Borrowing Costs.

Subsequent accountingtreatment of a nancialasset

IAS 39 and IFRS 9 (if adopted) apply to the nancial asset recognisedunder IFRIC 12. Under IAS 39, depending on whether the nancialasset is classied as a loan or receivable, as an available-for-salenancial asset or designated as at fair value through prot or loss,it is subsequently measured either at amortised cost or fair value,respectively. If IFRS 9 is applied, the nancial asset will be measured atamortised cost or at fair value through prot or loss.

Subsequent accountingtreatment of an intangibleasset

IAS 38 Intangible Assets applies to the intangible asset recognised

under IFRIC 12. IAS 38 allows intangible assets to be measured usingthe cost model or the revaluation model if there is an active market forservice concession arrangements.

2. Scope of IFRIC 12

IFRIC 12 applies to a broad range of concession arrangements. Road and water treatment concessionarrangements are two common examples, but other types of arrangements may meet the scopecriteria such as contracts for the:

provision of transport services;

construction and operation of waste treatment plants;provision of public airport services;construction and maintenance of hospitals;generation of renewable energy;production of electricity; andconstruction and operation of public transport systems, schools, prisons, etc.

IFRIC 12 provides specic scope criteria that must be met. These criteria are summarised in the followingowchart:[Extract from IFRIC 12 (Information Note 1)]

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Does the grantor control or regulate what

services the operator must provide with theinfrastructure, to whom it must provide them, andat what price?

NoOUTSIDETHE SCOPE OFTHE INTERPRETATIONSEE INFORMATION NOTE 2

YesDoes the grantor control through ownership,benecial entitlement or otherwise, any signicantresidual interest in the infrastructure at the end ofthe service arrangement?Or is the infrastructure used in the arrangementfor its entire useful life?

No

No

Yes

Is the infrastructure constructed or

acquired by the operator from athird party for the purpose ofthe service arrangement?

No

Is the infrastructure existing

infrastructure of the grantor towhich the operator is given accessfor the purpose ofthe service arrangement?

Yes

Yes

WITHIN THE SCOPE OF THE INTERPRETATION

Operator does not recognise infrastructure as property, plant and equipment or as a leased asset

Does the operator have a

contractual right to receive cashor other nancial asset from orat the direction of the grantor asdescribed in paragraph 16?YesOperator recognises a nancialasset to the extent that it has acontractual right to receive cash oranother nancial asset as describedin paragraph 16

No

Does the operator have a

contractual right to chargeusers of the public services asdescribed in paragraph 17?

No

OUTSIDETHE SCOPE OFTHE INTERPRETATIONSEE PARAGRAPH 27

YesOperator recognises an intangibleasset to the extent that it has acontractual right to receive anintangible asset as described inparagraph 17

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Control of the services

As noted in the ow chart, the Interpretation applies to public-to-private service concessionarrangements if:[IFRIC 12:5](a) the grantor controls or regulates what services the operator must provide with the infrastructure, towhom it must provide them, and at what price; and(b) the grantor controls - through ownership, benecial entitlement or otherwise - any signicant residualinterest in the infrastructure at the end of the term of the arrangement.The determination as to whether the grantor controls the price is important in evaluating whetherthe criterion in IFRIC 12:5 (a) is satised. IFRIC 12:AG3 states that for the purpose of condition [IFRIC12:5](a), the grantor does not need to have complete control of the price: it is sufcient for the priceto be regulated by the grantor, contract or regulator, for example by a capping mechanism.If the agreement requires review or approval of pricing by the grantor that would generally besufcient for the agreement to meet the IFRIC 12:5(a) requirement. Such reviews or approvals ofpricing should not be disregarded unless there is sufcient evidence supporting an assertion that areview or approval of pricing is non-substantive.If an agreement contained a cap but the cap is set such that it would only ever take effect in veryremote circumstances then the grantor would not be considered to have control over the price, e.g.stating in the contract that a road toll must not exceed CU1000, when the anticipated toll is CU2.Such a price capping mechanism would generally be considered non-substantive and the arrangementwould be outside the scope of IFRIC 12.

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Example 2.1Concession with unregulated prices and congestion paymentCompany A is granted a concession for the construction and operation of a toll road for 40 years.The price Company A is able to charge users is set by the grantor for years 1-3 of the arrangement.From the fourth year of operation of the toll road, Company A is able to charge users at a price itconsiders appropriate, based on its own strategy and business perspectives. However, the concessionarrangement provides for a mechanism known as a Congestion Payment whereby Company Awill pay certain amounts to the grantor if there is congestion (i.e., trafc jams) in the use of thecomplementary public infrastructure (i.e., nearby roads).The grantor exercises absolute control over the pricing for an insignicant period of time in the contextof the service concession arrangement as a whole. The congestion payment mechanism would needto be analysed to determine if it is substantive. If this mechanism is included in the contract solelyto avoid excessively high prices, it may not be substantive because the operator has the freedomto charge what it wants within a reasonable range. The only limitation is that the operator cannotcharge a price the market would not bear and in doing so create congestion on other roads. If themechanism is considered non-substantive, the arrangement would fall outside the scope of IFRIC 12.

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Example 2.2Competitive tender processArrangements in which the public sector seeks to attract private sector participation often involve atender process under which a number of entities respond to a Request for Proposal (RFP). The RFP mayrequest the respondent to specify the type and level of services that the respondent would provide ifits tender is successful, and the amounts that it would charge for those services. When the winningbid has been selected, the services and pricing agreed with the successful respondent are incorporatedinto a contractual arrangement. IFRIC 12 applies to arrangements in which the grantor controls orregulates which services the operator must provide with infrastructure, to whom it must provide them,and at what price. [IFRIC 12:5(a)]If an arrangement would otherwise fall within the scope of IFRIC 12, does the fact that services and/orprices are determined through a process of competitive tender preclude the arrangement from beingaccounted for under IFRIC 12?No. If the arrangement otherwise falls within the scope of IFRIC 12 because all the relevant criteriain IFRIC 12 are met, the fact that services and/or prices are determined through a competitive tenderprocess before the concession begins does not affect the conclusion as to whether the arrangementfalls within the scope.

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Signicant residual interests

When considering whether a signicant residual interest exists for purposes of determining whetherthe criterion in IFRIC 12:5(b) is satised, the residual value should be estimated as the infrastructure'scurrent value as if it was of the age and condition expected as at the end of the contract. An assetwhich will only be able to be sold for scrap value is unlikely to have a signicant residual value atthe end of the contract. Conversely, a building with a 50 year useful life that is only used in a serviceconcession arrangement for 20 years is likely to have a signicant residual value at the end of thearrangement. If a building with a signicant residual value is retained by the operator, the arrangementwould be outside the scope of IFRIC 12.IFRIC 12 does not address the circumstance in which the grantor provides an indemnication to theoperator in respect of the residual value of the assets at the end of the arrangement. When such anindemnication is provided, the facts and circumstances relating to the arrangement will need to beanalysed to determine whether the arrangement is within the scope of the Interpretation.

Under the terms of a service concession arrangement, an operator may be required to replace parts ofan item of infrastructure, for example the top layer of a road or the roof of a building. In these typesof arrangements, the item of infrastructure is considered as a whole for the purpose of determiningwhether the grantor controls any signicant residual interest. Thus, condition IFRIC 12:5(b) would bemet for the whole of the infrastructure, including the part that is replaced, if the grantor controls anysignicant residual interest in the nal replacement of that part. [IFRIC 12:AG6]Furthermore, an arrangement where the infrastructure is used for its entire useful life ('whole of lifeassets') would be within the scope of IFRIC 12 provided condition IFRIC 12:5(a) is met. This is the caseirrespective of which party controls any remaining insignicant residual interest. [IFRIC 12:6]

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Example 2.3Infrastructure used in a concession arrangement for its entire useful lifeThe term of a concession arrangement for the construction and operation of a solar thermal plant is30 years, which coincides with the estimated useful life of the plant. The fact that the infrastructure isnot controlled by the grantor at the end of the concession arrangement does not automatically leadto a conclusion that the concession arrangement is outside the scope of IFRIC 12. When the term ofa concession arrangement is equal to the useful life of the infrastructure, the arrangement is withinthe scope of IFRIC 12, provided that the grantor controls or regulates what services the operator mustprovide with the infrastructure, to whom it must provide them, and at what price (IFRIC 12:6).

Example 2.4Indenite term of the concession arrangementOne of two conditions necessary for IFRIC 12 to apply is that the grantor controls any signicantresidual interest in the infrastructure at the end of the term of the arrangement as indicated inparagraph 5(b).Certain arrangements allow the operator to renew the license arrangement indenitely withoutsignicant costs. In those cases, a careful analysis of all the facts and circumstances is necessary inorder to establish whether, at a point of possible renewal, there will be signicant residual interest.Where there may be signicant residual interest in the infrastructure, it is necessary to determine whocontrols that residual interest. If the terms of the arrangement are such that the grantor controls theresidual interest in the infrastructure if the operator chooses not to renew the license, the arrangementwould fall within the scope of IFRIC 12. In contrast, if the grantor does not control the signicantresidual interest in the infrastructure if the operator decides not to renew the arrangement, thearrangement would not meet the criterion in paragraph 5(b) and so would be excluded from thescope of IFRIC 12.

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Example 2.5Application of IFRIC 12 when residual interest is returned to grantor at fair valueAn entity (the operator) has entered into a service concession arrangement in which it will constructa bridge and operate that bridge for 30 years. It cannot sell the bridge to a third party unless thegovernment (the grantor) agrees to the sale. At the end of the arrangement, the grantor is required torepurchase the bridge for its fair value at the end of the term of the arrangement. The bridge has anestimated useful economic life of 50 years.Does the grantor control the residual interest in the infrastructure at the end of the term of thearrangement in accordance with IFRIC 12:5(b)?Yes. IFRIC 12:5 states, in part, 'This Interpretation applies to public-to-private service concessionarrangements if the grantor controls - through ownership, benecial entitlement or otherwise - anysignicant residual interest in the infrastructure at the end of the term of the arrangement.'IFRIC 12:AG4 states, in part, 'For the purposes of condition (b) [of IFRIC 12:5 outlined above], thegrantor's control over any signicant residual interest should both restrict the operator's practicalability to sell or pledge the infrastructure and give the grantor a continuing right of use throughout theperiod of the arrangement.' In this scenario, the operator would not be able readily to sell or pledgethe infrastructure even though it may be able to sell or pledge its economic interest in the residualvalue of the infrastructure.IFRIC 12 applies a control approach. Accordingly, the grantor has a continuing right of use of theinfrastructure asset at the end of the term of the arrangement and therefore controls the use of thebridge throughout its economic life. This is the case even though the grantor has to pay fair value forthe asset at the end of the term of the arrangement.

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Would the grantor control the residual interest in the infrastructure at the end of the term of thearrangement if the grantor has the option to purchase the bridge (at an amount equal to its fair value)rather than an obligation to repurchase?Yes. In the circumstances described, the condition in IFRIC 12:5(b) together identify when theinfrastructure ... is controlled by the grantor for the whole of its economic life is met due to theexistence of the purchase option at the end of the term of the arrangement; the grantor has thepower to purchase the bridge or to allow the operator to retain it for its continued use and/ordisposal.Due to the existence of the purchase option held by the grantor, the operator is unable readily to sellor pledge the infrastructure even though it may be able to sell or pledge its economic interest in theresidual value of the bridge.

Nature of the infrastructure

The Interpretation applies to both:[IFRIC 12:7](a) infrastructure that the operator constructs or acquires from a third party for the purpose of the servicearrangement; and(b) existing infrastructure to which the grantor gives the operator access for the purpose of the servicearrangement.The requirements may apply to previously recognised property, plant and equipment of the operatorwhere the derecognition criteria of IFRSs are met. If the operator is considered to have disposed of theasset by passing the signicant risks and rewards of and control over that asset to the grantor, thenthe operator should derecognise that asset in accordance with IAS 16:67. The operator would need todetermine whether the arrangement was within the scope of IFRIC 12.Sometimes the use of infrastructure is only partly regulated by the grantor. These arrangements take avariety of forms:

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(a) any infrastructure that is physically separable and capable of being operated independently and meetsthe denition of a cash-generating unit as dened in IAS 36 is analysed separately if it is used whollyfor unregulated purposes. For example, this might apply to a private wing of a hospital, where theremainder of the hospital is used by the grantor to treat public patients; and(b) when purely ancillary activities (such as a hospital shop) are unregulated, the control tests are appliedas if those services did not exist, because in cases in which the grantor controls the services in themanner described in IFRIC 12:5 above, the existence of ancillary activities does not detract from thegrantor's control of the infrastructure. [IFRIC 12:AG7]In either of the circumstances described above, there may in substance be a lease from the grantor tothe operator for that part of the infrastructure that is not regulated. If so, the lease should be accountedfor in accordance with IAS 17. [IFRIC 12:AG8]

Example 2.6Infrastructure with different activitiesAn operator is granted by the government the concession for a railway infrastructure. The operatorwill manage the infrastructure for 75 years, at which point the infrastructure will revert to thegovernment. The terms of the agreement split the concession between the railway terminal itself andthe shopping area. All activities are provided under the terms of the service concession arrangementand are controlled by the grantor, who regularly monitors the services provided. The railway activityis regulated as the government controls the services to be provided, the train companies to whichthe operator must provide them and the price charged by the operator. As a consequence, therailway activity falls within the scope of IFRIC 12:5. Regarding the retail activity, the operator canlease the shops to third parties for the purpose of running commercial outlets. Nevertheless, theagreement states that the operator needs to obtain formal permission before the shops are grantedin sub-concession and prices must be communicated to the grantor, although they are not subject toexplicit formal authorisation.

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The operator pays fees to the government for both sections of the concession. The agreementestablishes that the operator has an obligation to return a signicant percentage of the protsgenerated from the retail activity (shopping area) through a reduction in the tariffs charged to thetrain companies for the regulated activity (the terminal itself). As a result, the revenue stream from therailway activity is affected by the prots generated from the retail activity.At the end of the concession, all assets (from both activities) are returned to the grantor for noconsideration.The grantor controls the nature of the retail activity by setting the guidelines as to the services tobe provided, by approving the service providers and by monitoring that these guidelines are, in fact,applied by the operator. In addition, the pricing mechanism is such that part of the prots generatedby the shop area must be returned to the grantor via a reduction in the tariffs charged for the railwayactivity. Therefore indirectly the grantor controls the level of prots generated from the retail services.As a result of the interdependency of the revenue streams of these two activities and the level ofcontrol by the grantor of the shopping area, the entire operation of the railway infrastructure (terminalactivity and retail activity) may be subject to IFRIC 12.In contrast, if the activities were separable and not interdependent, they would be analysed separately.IFRIC 12:AG7(a) states that any infrastructure that is physically separable and capable of beingoperated independently and meets the denition of a cash-generating unit as dened in IAS 36Impairment of Assets must be analysed separately if it is used wholly for unregulated purposes.Ultimately, judgement based on all the facts and circumstances will be necessary to determine whetherinfrastructure assets with different activities are interdependent and should be assessed together forthe purposes of IFRIC 12.

IFRIC 12 does not scope in private-to-private arrangements but it could be applied to such arrangementsby analogy under the hierarchy set out in paragraphs 7-12 of IAS 8 Accounting Policies, Changes inAccounting Estimates and Errors. [IFRIC 12:BC14]

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The Interpretation specically excludes the accounting by grantors, i.e. public sector accounting. [IFRIC12:9]Where an arrangement does not fall within the scope of IFRIC 12 it may fall within the scope of otherIFRS pronouncements. The following table, extracted from Information Note 2 to IFRIC 12, indicateswhich Standards may be applicable:

Category

Lessee

Service provider

Typicalarrangementtypes

Lease (e.g.Operatorleases assetfrom grantor)

Service and/ormaintenancecontract(specic taskse.g. debtcollection)

AssetOwnership

Buildoperatetransfer

BuildOwnOperate

Grantor

Capitalinvestment

Operator

Shared

Grantor

Typicalduration

8-20 years

1-5 years

Residualinterest

Operator and/or Grantor

25-30 YearsGrantor

IAS 17

100%Divestment /Privatisation /Corporation

Operator

Grantor

Demand risk

RelevantIFRSs

Rehabilitate-operatetransfer

Owner

IAS 18

OperatorIndenite (ormay be limitedby licence)Operator

IFRIC 12

IAS 16

When assessing the contractual terms of some arrangements, it is possible that they could fall within thescope of both IFRIC 4 Determining whether an Arrangement contains a Lease and IFRIC 12. To eliminateany inconsistencies between the accounting treatment for contracts which have similar economic effects,with the issuance of IFRIC 12, the IFRIC also amended IFRIC 4 to specify that if a contract appears to fallwithin the scope of both Interpretations then the requirements of IFRIC 12 prevail [IFRIC 4:4(b)].

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3. The accounting models

3.1 RevenueAn operator provides services under the terms of the contractual arrangement and receives paymentfor its services over the period of the arrangement. This typically involves the operator constructingor upgrading infrastructure which is used to provide a public service and then being responsible foroperating and maintaining that infrastructure for a specied period of time. [IFRIC 12:12]Revenues and costs of the operator relating to the construction or upgrade services phase of the contractare accounted for in accordance with IAS 11 Construction Contracts [IFRIC 12:14] and the revenue andcosts relating to the operating phase are accounted for in accordance with IAS 18 Revenue. Where theoperator performs more than one service under a single contract or arrangement, the considerationreceived or receivable is allocated by reference to the relative fair value of services delivered, when theamounts are separately identiable. [IFRIC 12:13]The nature of the consideration determines its subsequent accounting treatment (see 3.2 below).Example 3.1.1Recognition of a prot margin on construction work Infrastructure constructed by theoperatorCompany A has been granted a concession arrangement for the construction and operation ofan airport. Company A will be responsible for the construction of the infrastructure. IFRIC 12:14states that an operator must account for revenue and costs relating to the construction phase of aconcession arrangement in accordance with IAS 11. Consequently, if this is a construction contractas specied in IAS 11, a prot margin on the construction work will be included in As nancialstatements by reference to the stage of completion. This margin arises because Company A hasreceived an intangible asset or a nancial asset as consideration for the construction of the airport,which constitutes consideration in the form of an asset that differs in nature from the asset deliveredand, in accordance with IFRIC 12:15, the consideration received or receivable is recognised at its fairvalue.

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Example 3.1.2Recognition of a prot margin on construction work Infrastructure acquiredThe facts are as described in Example 3.1.1 above, except that Company A (the operator) outsourcesthe construction of the airport to Company B (the sub-contractor), an unrelated company. The grantoris informed of, and approves, the outsourcing of the construction, although it does not enter into aspecic and direct agreement with the subcontractor.The operator will recognise revenue and costs associated with the construction work depending onwhether it is acting as an agent or a principal, based on the substance of the agreements with boththe concession grantor and the sub-contractor. The fact that the grantor is informed of, and approves,the agreement between Company A and its sub-contractor is not in and of itself evidence that theoperator is acting as an agent. The analysis requires a careful consideration of all other relevant factsand circumstances and the application of judgement.IAS 18:IE 21 provides guidance on how to determine when an entity is acting as a principal or asan agent. An entity is acting as a principal when it has exposure to the signicant risks and rewardsassociated with the sale of goods or the rendering of services. Features that indicate that an entity isacting as a principal include:(a) the entity has the primary responsibility for providing the goods or services to the customer or forfullling the order, for example by being responsible for the acceptability of the products or servicesordered or purchased by the customer;(b) the entity has inventory risk before or after the customer order, during shipping or on return;(c) the entity has latitude in establishing prices, either directly or indirectly, for example by providingadditional goods or services; and(d) the entity bears the customer's credit risk for the amount receivable from the customer.In the above example if the analysis of all relevant facts and circumstances leads to the conclusionthat, in substance, Company A is acting as an agent, then revenue and prot margin shall not berecognised on a gross basis. Instead, Company A should recognise the fees associated with theservice provided as an agent as net revenue. If, however, based on all relevant facts and circumstancesit is concluded that Company A is acting as a principal in relation to the construction services,then Company A should recognise on a gross basis revenue and the prot margin arising from theconstruction services in accordance with IAS 11.

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3.2 Determining the nature of the operator's asset

The infrastructure within the scope of IFRIC 12 is not recognised as property, plant and equipment ofthe operator because the operator does not have the right to control the asset, but merely has accessto the infrastructure in order to provide the public service in accordance with the terms specied in thecontract. [IFRIC 12:11] It is also not treated as a lease as the operator does not have the right to controlthe use of the asset. [IFRIC 12:BC 23] Instead, the operator's right to consideration is recorded as anancial asset, an intangible asset or a combination of the two.The requirements of IFRIC 12 regarding the nature of the asset to be recognised can be summarised asfollows.

Operator's rights

Classication

Examples

Unconditional, contractual right to

receive cash or other nancial assetfrom or at the direction of the grantor.

Financial asset [IFRIC 12:16]

Operator receives a xed amount

from the grantor over term ofarrangement.

Amounts to be received are contingent

on the extent that the public uses theservice.

Intangible asset [IFRIC 12:17]

Operator has a right to charge users

over the term of the arrangement. Operator has a right to charge thegrantor in proportion to usage ofthe services over the term of thearrangement.

Consideration received partly in the

form of a nancial asset and partly inthe form of an intangible asset

Bifurcated model [IFRIC 12:18]

Operator receives a xed amount

from the grantor and a right tocharge users over the term of thearrangement Operator has a right to chargeusers over term of arrangement,but any shortfall between amountsreceived from users and a speciedor determinable amount will bereimbursed by the grantor.

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In some service concession arrangements, the operator may have a contingent right to collect cashor another nancial asset from the grantor instead of charging users, if usage of the asset exceedsa specied threshold. Where the threshold has economic substance (i.e. there remains a genuinepossibility that it might not be met), the operator does not have an unconditional contractual right tocash and accordingly would recognise an intangible asset. If the threshold lacks economic substancebecause the possibility of the threshold not being met is remote, the conditionality should be ignoredand the operator should recognise a nancial asset.

The accounting for a concession arrangement will be determined by the specic terms of the contractand therefore it is difcult to provide specic guidance about the differences between and the impactson the income statement of the three models within IFRIC 12. However, the graph below illustrates ingeneral terms the likely impact on net income of each model over the term of the arrangement.In the case of a transport concession arrangement with a signicant upfront investment in theinfrastructure that is nanced with bank borrowings, the nancial asset model will generally giverise to higher net income in the rst few years of the concession term and lower income in the lastfew years. The intangible asset model will likely have the opposite consequences and will give rise tolower income in the rst few years of the concession term compared to the nancial asset model andhigher income in later years. This difference between the two models normally arises because underthe nancial asset model the income is front-loaded in the early years due to the use of the effectiveinterest rate method and no amortisation of the asset. The net income under the bifurcated modelis likely to be between those of the two pure models (the nancial asset model and the intangibleasset model).

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Net income

Distribution of net income over concession period

10

20

30

40

50

Years

Intangible asset model

Bifurcated model

Financial asset model

Basic data of the illustrative example shown in the graph:

standard toll road; 50-year concession term; 80%-nanced with bank borrowings; initial ramp up and subsequent 3% annual growth in trafc; operating costs rising in line with the increase in the CPI; and for the bifurcated model, there is a guarantee of collection of 40% of the investment.

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Example 3.2.1Examples of some typical concession mechanisms

Characteristics

Type of assetrecognised bythe operator

Reason

Hospital the operator receives a

xed amount of revenue, subject todeductions for lack of availability.

Financial asset

Revenue not dependent on usage.

Deductions reect failure to meet specied qualityrequirements.

Toll road the amounts receivable

by the operator are subject to littlevariation in practice because theroad is an established route withhighly predictable level of tolls.

Intangible asset

Right to charge users.

Amounts depend on usage of the infrastructure, regardlessof whether variation in usage is expected in practice.

Toll road the operator has a

guarantee by the grantor ofminimum revenue that will not fallbelow a specied level.The guarantee is achieved throughan increase in the concession period.

Intangible asset

Right to charge users.

Amounts depend on usage of the infrastructure. Shortfall guaranteed by the grantor via a concessionextension and not via a right to receive cash.

Water supply concession the

grantor regulates prices that theoperator may charge to usersor adjusts the duration of theconcession based on a targeted rateof return.

Rail concession - the grantor pays

Toll bridge - the grantor pays a

xed payment based on availabilityduring the rst half of the concessionperiod and then switches to usagepayment.

Intangibleasset andnancial asset- Bifurcatedmodel

Grantor pays operator.

Amounts do not depend on usage of the infrastructureduring the rst half of the concession and are usagedependent during the second half. Financial asset arises from the right to receive cash fromgrantor during the rst part of the concession irrespectiveof usage; the intangible asset arises from the right tocharge the grantor in the second half based on usage.

Right to charge users.

Amounts depend on usage of the infrastructure.Shortfall guaranteed by the grantor.Financial asset arises from the right to receive a minimumdeterminable amount of cash from users/grantor andintangible asset from the right to earn additional amountsabove the xed guaranteed payments.

27

Example 3.2.2Take-or-pay arrangementsA public sector entity enters into an arrangement for the construction and operation of a desalinationplant whereby the concession operator receives the following two items of consideration over theterm of the concession: a specied annual amount as consideration for the investment undertaken; and a specied amount per cubic metre of desalinated water produced by the plant where thegrantor guarantees the purchase of all the water output that the plant can produce (take-or-payarrangement). This specied amount per m3 is sufcient to cover the concession operatorsproduction costs based on the technical capacity of the plant of 24 million m3 of water per year.As the grantor has guaranteed to purchase all of the water output from the plant, the operator isonly exposed to availability risk during the operating period, but not demand risk. The concessionarrangement should therefore be accounted for using the nancial asset model.If, under the terms of the arrangement, the grantor had only guaranteed to purchase a proportionof the desalinated water output (e.g., up to 15 million m3 per year) and the operator has a right tocharge users for the remaining output (provided that the grantor controls to whom it must be soldand at what price) the concession operator should apply the bifurcated model (i.e., a nancial assetand an intangible asset).

28

Example 3.2.3Payments for capacity availabilityCompany A is granted a concession arrangement for the construction and operation of a hospitalfor 30 years. This arrangement stipulates that A will be paid a specied amount that will enable it torecover the investment made provided that it has a pre-determined minimum number of hospital bedsoperating and available.IFRIC 12:16 states that the operator has an unconditional right to receive cash if the grantorcontractually guarantees to pay the operator specied or determinable amounts, even if paymentis contingent on the operator ensuring that the infrastructure meets specied quality or efciencyrequirements (availability payments). Therefore, in this example, Company A should apply the nancialasset model.

Example 3.2.4Guaranteed minimum revenue Guarantee of NPV of revenue with extension ofconcession termCompany A is granted a concession arrangement for a waste treatment plant in which the concessionterm ends automatically when the concession operator has received a previously stipulated net presentvalue of net revenue (sales less operating costs) from users of the plant. If this minimum guaranteedrevenue is not achieved in the normal term of the concession, the term will be extended for successiveve-year periods until the guaranteed minimum revenue is achieved.Since Company A does not have an unconditional contractual right to receive cash or another nancialasset, the concession term could be extended indenitely and the guaranteed minimum revenue mightnever be achieved, the concession arrangement should be accounted for using the intangible assetmodel.

29

Example 3.2.5Guaranteed minimum revenue Guarantee of NPV of revenue with limited extension ofconcession term and nal cashAssume the same facts as described in Example 3.2.4 above, except that there is a clause limitingthe maximum concession term that can be reached with the successive extensions to 50 years. Thegrantor has guaranteed to pay any shortfall, adjusted for the time value of money, if the minimumguaranteed revenue has not been achieved by the end of the 50-year limit. Since Company A has anunconditional contractual right to receive cash, the nancial asset model should be applied in thiscase.

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4. Financial asset model

As outlined above, the nancial asset model applies if the operator has a contractual right to receive cashfrom or at the direction of the grantor and the grantor has little, if any, discretion to avoid payment. Thiswill be the case if the grantor contractually guarantees to pay the operator: specied or determinable amounts; or the shortfall, if any, between amounts received from users of the public service and specied ordeterminable amounts.A nancial asset exists in these circumstances even if the payments are contingent on the operatorensuring that the infrastructure meets specied quality or efciency requirements. [IFRIC 12:16]The nancial asset model cannot apply if the grantor only pays when users use the service or if thegrantor only grants a right to charge users for the service.The nancial asset is accounted for in accordance with IAS 39 Financial Instruments: Recognition andMeasurement or IFRS 9 Financial Instruments (available for early adoption and mandatory for nancialreporting periods commencing on or after 1 January 2013*). The requirements of IAS 32 FinancialInstruments: Presentation and IFRS 7 Financial Instruments: Disclosures also apply.Under IAS 39 Financial Instruments: Recognition and Measurement, the nancial asset will, dependingon the circumstances, be required to be classied [IFRIC 12:24]: as at fair value through prot or loss, if so designated upon initial recognition (provided that theconditions for this classication are met); or as a loan or receivable; or as 'available-for-sale'.The asset can only be classied as a loan or receivable if payments are xed or determinable and the onlysubstantial risk of non-recovery of the initial investment is credit deterioration of the counterparty. IFRIC12 assumes that the nancial asset will not be classied as held to maturity. [IFRIC 12:BC61]

* IFRS 9 has not been endorsed by the European Union and, at the time of writing, no expected endorsement date appears on the endorsementstatus report produced by the European Financial Reporting Advisory Group (EFRAG). It appears unlikely that EFRAG will recommend endorsementuntil all elements of the IASBs project to replace IAS 39 have been completed. Therefore, for the foreseeable future, early adoption of IFRS 9 will notbe an option for companies incorporated in a European Union member state.

31

If the amount due from the grantor is accounted for either as a loan or receivable or as an availablefor-sale nancial asset, IAS 39 requires interest calculated using the effective interest method to berecognised in prot or loss [IFRIC 12:25].If IFRS 9 Financial Instruments is applied, the amount due from, or at the direction of, the grantor isaccounted for as follows [IFRIC 12:24]: at amortised cost; or measured at fair value through prot or loss.IFRS 9 requires interest calculated using the effective interest method to be recognised in prot or losswhen the asset is accounted for at amortised cost [IFRIC 12:25].Revenues and costs relating to the construction or upgrade phase of the contract are accounted forin accordance with IAS 11. A nancial asset is recognised during the construction or upgrade activityand nance income is recognised using the effective interest rate method on the nancial asset as wellas revenue relating to the construction or subsequent upgrade phase. Moreover, the nancial asset isreduced when amounts are received. Revenues from the operational phase are recognised in accordancewith IAS 18.

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Some practical issues may arise as the contracts usually establish a single payment mechanism but theamounts are not split between the construction services consideration (which will reduce the nancialasset) and the operating services consideration (which will be revenue). It will be necessary to identifythe underlying revenue streams that relate to both activities. This allocation will require a signicantamount of judgement.For the purposes of determining the construction and operation service revenue over the concessionterm, Example 1 of IFRIC 12 illustrates that an appropriate approach is for an entity to establishappropriate margins for determining the revenue streams rst. The example shows how the fair valueof the consideration from both activities is calculated as the projected costs plus a reasonable marketmargin. The discount rate to be used is calculated once the revenue and costs from both activitieshave been allocated. This discount rate would be one that causes the aggregate present value of allsums receivable from the grantor to be equal to the fair value of the services to be provided over theconcession term. This rate would be similar to an internal rate of return of the project.In practice, some companies establish rst an appropriate discount rate in order to determine theappropriate prot margins on the construction and operational services. Signicant judgement isrequired in the selection of the appropriate discount rate and the allocation of the total considerationreceived or receivable to the relative fair value of the construction and operational services deliveredas this will affect the future revenue recognition pattern. Care should be taken to ensure the overallreasonableness of any model chosen.

33

Example 4.1Financial asset modelAn operator enters into a contract to provide construction services costing CU100. It has beendetermined that the fair value of the construction services provided is CU110. The total cash inowsover the entire life of the contract are xed by the grantor at CU200. The nance revenue to berecognised that is calculated by using the effective interest rate method in accordance with IAS 39 isCU10 over the entire life of the service concession arrangement, and the balance of CU80 (CU200 CU110 - CU10) relates to services provided during the operational phase. The following journal entriesare made in this scenario.During constructionCUDr Financial asset

CU

110

Cr Construction revenue

110

To recognise revenue relating to construction services, to be settled in cash.

To recognise revenues relating to the operational phase.

To recognise cash received from the grantor.

Total cash inows over the life of the contract

CU200

A more detailed example of the nancial asset model is included as Example 1 in the Illustrative Examples to IFRIC 12.

35

Example 4.2Classication of income and expenseConcession operator A has a contractual right to receive cash from the grantor. It applies the nancialasset model and recognises interest income resulting from the unwinding of the discount on thenancial asset.IFRIC 12 does not address the presentation of such interest income in the statement of comprehensiveincome; this matter is subject to the general requirements of IAS 1 Presentation of nancialstatements.As explained in more detail in Chapter 3 of iGAAP 2011 A guide to IFRS Reporting, presentation ofincome and expenses shall consider the nature and function of such items and also their relevance tothe understanding of an entitys nancial performance in the context of the specic entitys business.This analysis also requires an overall consistency of the presentation of items in the statement ofcomprehensive income so that information is not misleading.IAS 18:7 denes revenue as the gross inow of economic resources during the period arising fromordinary activities, excluding inows from equity participants. Judgement is required in determining anentitys ordinary activities. Accordingly, whether interest income generated by Company A above shallbe recognised as nance income or as revenue will depend on the specic facts and circumstances ofthe companys business.

36

Changes in the estimated cash ows

Although under the nancial asset model the concession operator has a contractual right to receivecash or another nancial asset in accordance with IAS 32 and IAS 39 or IFRS 9, changes in expectedcash ows could arise for example as a result of a change in the remuneration scheme due toadditional works or services demanded and approved by the grantor, payments related to availabilityor quality levels, etc.When the entity revises its estimates of receipts, it shall adjust the carrying amount of the nancialasset to reect the revised cash ows. Under IAS 39:AG8, the entity recalculates the carrying amountof the receivable by computing the present value of estimated future cash ows at the nancialinstruments original effective interest rate and this adjustment is recognised in prot or loss as incomeor expense.

37

5. Intangible asset model

The intangible asset model applies if the operator receives a right (a licence) to charge users, or thegrantor, based on usage of the public service. There is no unconditional right to receive cash as theamounts are contingent on the extent that the public uses the service. [IFRIC 12:17]Shadow tollsArrangements in which the grantor, rather than the users, pay the operator amounts based on usageare often described as 'shadow tolls'. If the amounts received by the operator are contingent on usagerather than being an unconditional right to receive cash or another nancial instrument, the operatorrecognises an intangible asset.

During the construction phase the operator recognises revenue in respect of construction activities withthe corresponding entry increasing the amount recognised for the intangible asset (see discussion in3.1.2 on whether the operator acts as principal or agent with regards to construction services). Thisis because the operator exchanges construction services in return for a licence. The grantor makes anon-cash payment for the construction services by giving the operator an intangible asset in exchangefor the construction services. As this is an exchange of dissimilar goods and services, in accordance withIAS 18:12, revenue must be recognised on the transaction.The intangible asset generates a second stream of revenue when the operator receives cash from usersor from the grantor based on usage. This is in contrast with the nancial asset model in which moniesreceived are treated as partial repayment of the nancial asset. In the intangible asset model, theintangible asset is reduced by amortisation rather than repayment.This results in revenue being recognised twice once on the provision of construction services (inexchange for the intangible asset) and a second time on the receipt of payments for usage.The intangible asset must be accounted for in accordance with IAS 38 Intangible Assets. The intangibleasset should be amortised over the period of the concession. The annuity method of amortisationis specically prohibited. [IFRIC 12:BC65] The most appropriate method of amortisation of theintangible asset is usually the straight-line method, unless another method better reects the patternof consumption of the assets future economic benets. However, in some circumstances, where theexpected pattern of consumption of the expected economic benets is based on usage, it may beappropriate to use an alternative method of amortisation.38

Example 5.1Amortisation under the intangible asset modelCompany B enters into an arrangement under which it will build and operate a toll bridge. CompanyB is entitled to charge users for driving over the toll bridge for the period from the completionof construction until 1 million cars have driven across the bridge, at which point the concessionarrangement will end. It would be appropriate for Company B to amortise its intangible asset based onusage, as Company B's licence to operate the bridge expires on the basis of usage rather than with thepassage of time.

Example 5.2Intangible asset modelAs in example 4.1, an operator enters into a contract to provide construction services costing CU100.It has been determined that the fair value of the construction services provided is CU110. The totalcash inows over the entire life of the contract are expected to be CU200, however this amount is notguaranteed by the grantor. The following entries are made in this scenario:During constructionCUDr Cost of construction

To recognise amortisation expense relating to the operational phase.

To recognise revenues received from users in the operational phase.

Total revenue over the life of the contract

Total cash inows over the life of the contract

CU200

A more detailed example of the intangible asset model is included as Example 2 in the Illustrative Examples to IFRIC 12.

Changes in estimated cash ows

Concessions are generally granted for long periods of time. Therefore, there are often changes in theinitial estimates of future cash ows relating to the arrangement, for example: due to changes in the usage of the infrastructure by the users (increase in trafc on the road,increase in the number of passengers, etc.); or due to changes in the estimated costs or other assumptions relating to the arrangement.Such changes might be an indicator of impairment of the intangible or suggest that the amortisationmethod for the intangible should be reviewed.

40

6. Bifurcated model

Where an operator receives a nancial asset and an intangible asset as consideration, it is necessary toaccount separately for the component parts. At initial recognition, both components are recognised atthe fair value of the consideration received or receivable in respect of work carried out until that date.[IFRIC 12:18] A 'residual approach' is taken in arriving at a value for both components. To the extentthat the operator receives a contractual right to receive cash from or at the direction of the grantor, anancial asset is recognised. Any excess of the fair value of the construction services provided over thefair value of the nancial asset recognised will be recognised as an intangible asset.

Example 6.1Bifurcated modelAs in example 4.1, an operator enters into a contract to provide construction services costing CU100.It has been determined that the fair value of the construction services provided is CU110. The totalcash inows over the entire life of the contract are expected to be CU200. Of these, CU60 areguaranteed by the grantor. The appropriate nance revenue to be recognised derived from applyingthe effective interest rate method in accordance with IAS 39 is in total CU6 over the entire life of theservice concession arrangement. The following entries are made in this scenario:During constructionCUDr Financial asset

CU

60

Cr Revenue

60

To recognise revenue relating to construction services, to be settled in cash.

To recognise nance revenues.

Cr Intangible asset (Accumulated depreciation)

To recognise amortisation expense relating to the operational phase.

To recognise revenues relating to the operational phase and cash received from the grantor and users.Total revenue over the life of the contract

CU250

Total cash inows over the life of the contract

CU200

A more detailed example of the bifurcated model is included as Example 3 in the Illustrative Examples to IFRIC 12.

42

7. Maintenance obligations

A service concession arrangement may require an operator to:

1. Maintain the infrastructure to a specied level of serviceability; and/or2. Restore the infrastructure to a specied condition at the end of the arrangement before it is handedover to the grantor.For example, an operator of a toll road may be required to resurface a road to ensure that it does notdeteriorate below a specied condition. IFRIC 12:21 states that such contractual obligations to maintainor restore the infrastructure should be recognised and measured in accordance with IAS 37 Provisions,Contingent Liabilities and Contingent Assets. Therefore, an estimate of the expenditure that wouldbe required to settle the present obligation at the end of the reporting period needs to be made andrecognised as a provision.

43

The Interpretation does not include guidance on the timing of recognition of the obligations becausethe terms and conditions of the obligation will vary from contract to contract and the requirementsand guidance in IAS 37 should be followed to identify the period(s) in which different obligationsshould be recognised.In the case of resurfacing a road, it may be that the amount required to settle the obligation at anypoint in time is linked to the number of vehicles that have travelled over the road. Thus usage of theroad may determine the obligating event. This is illustrated by Example 2 of IFRIC 12 which builds upthe provision for the resurfacing obligation over time.In contrast, when the entity is obligated to restore the infrastructure to a specied condition at theend of the arrangement irrespective of the usage, it represents in substance an obligation analogousto dismantling or removing the asset and restoring the site on which the asset stands under IFRIC 1Changes in Existing Decommissioning, Restoration and Similar Liabilities; therefore, the obligationarises on contract signing. Under the intangible asset model, such an obligation is included in the costof the asset and is subsequently amortised.IFRIC 12 envisages that maintenance obligations could alternatively be a revenue earning activity,in particular under the nancial asset model as illustrated in IFRIC 12 (Example 1). If the grantorreimburses the operator for maintenance, such as resurfacing the road, then the operator would notrecord the obligation in the statement of nancial position but recognise the revenue and expense inprot or loss when the resurfacing work is performed. The accounting result is similar to that of anupgrade (see section 8).Ultimately, the accounting treatment for maintenance obligations will depend on the precise termsand circumstances of the obligations which will vary from contract to contract and should not beaffected by the nature of the infrastructure asset recognised (i.e., a nancial asset or an intangibleasset).

44

IAS 37 requires that when the effect of the time value of money is material, the amount of a provisionshould be the present value of the expenditures expected to be required to settle the obligation. IAS37 indicates that where discounting is used, the carrying amount of a provision increases in eachperiod to reect the passage of time and that this increase is recognised as a borrowing cost (notethat these borrowing costs are not capitalised since they are incurred once the asset is ready for use).This is the only guidance that the standard gives on the unwinding of the discount. In addition, IFRIC1 Changes in existing decommissioning, restoration and similar liabilities addresses some of the issuesrelating to the use of discounting in the context of provisions for obligations to dismantle, removeor restore items of property, plant and equipment and concludes that the periodic unwinding of thediscount shall be recognised in prot or loss as a nance cost as it occurs [IFRIC 1:8].After initial recognition, provisions should be reviewed at the end of each reporting period andadjusted to reect current best estimates.Adjustments to provisions arise from three sources: revisions to estimated cash ows (both amount and timing); changes to present value due to the passage of time; and revisions of discount rates to reect prevailing current market conditions.In the years following the initial recognition and measurement of a provision at its present value, theprovision should be revised to reect estimated cash ows being closer to the measurement date.Whilst the unwinding of the discount relating to the passage of time should be recognised as anance cost, the revision of estimates of the amount and timing of cash ows is a reassessment of theprovision and should be charged or credited as an operating item rather than as a nance cost. This isconsistent with IFRIC 1 Changes in existing decommissioning, restoration and similar liabilities whichtreats changes in the estimated timing or amount of the obligation and changes in the discount rateas operating items with periodic unwinding of the discount recognised as a borrowing cost.

45

Example 7.1Resurfacing obligations and changes in the estimates of the provisionThe operator's resurfacing obligation arises as a consequence of use of the road during the operatingphase. It is recognised and measured in accordance with IAS 37, i.e. at the best estimate of theexpenditure required to settle the present obligation at the end of the reporting period.At any date, the best estimate of the expenditure required to settle the obligation in the future islikely to be proportional to the number of vehicles that have used the road. For illustrative purposes,a continuous trafc ow is assumed allowing for the use of a straight-line method that increases theprovision by a xed amount (discounted to a current value) each year.The operator discounts the provision to its present value in accordance with IAS 37.Illustration 1 No changes in estimatesThe best estimate of the expenditure required amounts to CU100 at the end of year 6. The obligationincreases by CU16.67 (i.e. CU100 divided by 6 years), discounted to a current value each year and theinitial discount rate is 6%. There are no subsequent changes in estimates.The charge recognised each period in prot or loss will be as follows:Year

Estimated cost of resurfacing

100

100

100

100

100

100

Estimated discount rate

6.0%

6.0%

6.0%

6.0%

6.0%

6.0%

12.45

26.40

41.98

59.33

78.62

12.45

13.20

13.99

14.83

15.72

16.67

86.87

0.00

0.75

1.58

2.52

3.56

4.72

13.13

12.45

26.40

41.98

59.33

78.62

100.00

100.00

Opening provisionObligation arising in year (operating cost)

Total

Increase in prior year provision

arising from passage of time (nance cost)

Used in yearClosing provision

46

(100.00)12.45

26.40

41.98

59.33

78.62

0.00

Illustration 2 Subsequent change in discount rate

The best estimate of the expenditure required is CU100 at the end of year 6. The obligation increasesby CU16.67 (i.e. CU100 divided by 6 years), discounted to a current value each year and the initialdiscount rate is 6%. Subsequently, as a result of a reassessment of prevailing market rates at thebeginning of year 4 the discount rate changes to 4%.The expense recognised each period in prot or loss will be as follows:Year

Estimated cost of resurfacing

100

100

100

100

100

100

Estimated discount rate

6.0%

6.0%

6.0%

4.0%

4.0%

4.0%

12.45

26.40

41.98

61.64

80.13

12.45

13.20

13.99

17.98

16.03

16.67

90.32

0.00

0.75

1.58

1.68

2.47

3.21

9.68

12.45

26.40

41.98

61.64

80.13

100.00

100.00

Opening provisionObligation arising in year (operating cost)

Total

Increase in prior year provision

arising from passage of time (nance cost)

Used in yearClosing provision

(100.00)12.45

26.40

41.98

61.64

80.13

0.00

At the beginning of year 4, the discount rate has changed to 4%. The obligation at the end of year3 was CU41.98. The unwinding of the discount would be the increase in the prior year obligationarising from the passage of time, so an amount of CU1.68 (CU41.98 x 4%) would be charged as anance cost and the additional amount of CU17.98 (being the net present value of the additional 1/6of the CU100 provision for the year plus the increase in the provision resulting from the fall in discountrate from 6% to 4%) would increase the provision as an operating item.

47

Illustration 3 Subsequent revision to the estimated cash ows

The best estimate of the expenditure required is CU100 at the end of year 6. The obligation initiallyincreases by CU16.67 (i.e. CU100 divided by 6 years), discounted to a current value each year and thediscount rate is 6%. Subsequently, at the beginning of year 4, the best estimate changes to CU 106.The charge recognised each period in prot or loss will be as follows:Year

Estimated cost of resurfacing

100

100

100

106

106

106

Estimated discount rate

6.0%

6.0%

6.0%

6.0%

6.0%

6.0%

12.45

26.40

41.98

62.89

83.33

12.45

13.20

13.99

18.39

16.67

17.67

92.38

0,00

0.75

1.58

2.52

3.77

5.00

13.62

12.45

26.40

41.98

62.89

83.33

106.00

106.00

Opening provisionObligation arising in year (operating cost)

Total

Increase in prior year provision

arising from passage of time (nance cost)

Used in yearClosing provision

(106.00)12.45

26.40

41.98

62.89

83.33

0.00

Based on the revised estimate of CU106 at the end of year 6, the obligation at the end of year 4should be CU62.89 (CU106 / 6 * 4 years, discounted by 2 years at 6%). The nance cost in the year ofrevision is the increase in the prior year obligation arising from the passage of time using the discountrate of 6% (CU41.98 * 6% = CU2.52). Any other adjustment to the carrying value of the provision (i.e.,an additional years worth of the obligation plus the adjustment arising from the increase in the bestestimate of the cash ow at the end of year 6 to CU106) is charged as an operating expense.

48

8. Upgrade of existinginfrastructure or newinfrastructureA service concession arrangement contract may require an operator to perform additional constructionworks during the operation phase. It will be a matter of judgement whether this subsequentexpenditure represents maintenance or an upgrade of an existing infrastructure. Construction workwould usually be considered an upgrade of existing infrastructure if it extends the life or capacity ofthe asset even though the additional revenues provided may not be identiable on a standalone basis.For example, construction of an extra lane of a motorway will allow an increase in the trafc owand it will represent an upgrade even though it is unclear how much trafc it produces by itself. Onthe other hand, construction work that does not extend the life or the capacity of the asset is usuallyconsidered to represent maintenance.As explained in section 7, contractual obligations to maintain or restore infrastructure that aremaintenance work shall be recognised and measured in accordance with IAS 37 Provisions, ContingentAssets and Contingent Liabilities.IFRIC 12:14 states that revenues and costs of the operator relating to the construction or upgradeservices phase of a contract are accounted for in accordance with IAS 11 Construction Contracts. Ifthe operator has an unconditional contractual right to receive cash in order to recover the additionalupgrade investment, the fair value of the upgrade investment will be treated as a receivable underthe nancial asset model. If the operator has the right to charge users to recover the upgradeexpenditure, the fair value of the upgrade elements will be treated as an intangible asset underthe intangible asset model. To the extent that the revenues expected to be generated from theupgrade cannot be readily linked to the upgrade itself, it will generally be appropriate to recognisea single intangible asset for the initial construction work and the subsequent upgrade. In such acase, to the extent that the operator has an unavoidable obligation to upgrade the infrastructure,it would generally be appropriate to recognise, at the outset of the arrangement, the full intangibleasset including the upgrade service with a performance obligation for the construction work to beundertaken in the future.

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9. Borrowing costs

Borrowing costs attributable to a concession arrangement should be capitalised during the constructionphase, in accordance with IAS 23, if the operator has a contractual right to receive an intangible asset.A nancial asset is not a qualifying asset and so borrowing costs are recognised as an expense in theperiod in which they are incurred. [IFRIC 12:22] Under the nancial asset model interest is imputed onthe nancial asset using the effective interest method (see Section 4). The nancial asset generatesinterest income since it is accounted for in accordance with IAS 39 (or IFRS 9 if early applied) althoughthe construction phase is still in process [IFRIC 12:IE8].

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10. Arrangements that do not

give rise to construction orupgrade servicesIFRIC 12 envisages that under certain service concession arrangements, the operator does notundertake construction or upgrade activities, but instead the grantor gives the operator access toexisting infrastructure for the purpose of the service arrangement. [IFRIC 12:7b] However, IFRIC 12does not deal specically with situations where a service concession arrangement consists only ofan operation phase, so it is necessary to apply the requirements of other relevant IFRSs as discussedbelow.In such arrangements, the grantor may pay the operator directly for providing the service or give theoperator a right to charge users at a regulated price. If the operator is paid a xed sum by, or at thedirection of, the grantor, revenue relating to the operating phase is accounted for in accordance withIAS 18 Revenue and costs are expensed as incurred. There is no nancial asset relating to constructionservices to be recognised at inception.Where the operator is given a right to charge users, it would be inappropriate to recognise anintangible asset with a corresponding credit to income at inception of the contract. This is because,in contrast to an arrangement where the operator has constructed the infrastructure, there has beenno exchange of dissimilar goods and services in return for the licence at inception in accordance withIAS 18:12. In such arrangements, the operator should recognise revenue from users as earned, chargecosts as incurred and recognise a provision for any contractual obligations to maintain and restore theinfrastructure in accordance with IAS 37.Where the operator pays the grantor to acquire a licence so it can charge users for a public service,the operator should recognise an intangible asset at cost, including the present value of all futurexed payments, in accordance with IAS 38. If future amounts payable are contingent on usage, thoseamounts payable should be recognised as an expense as usage occurs, rather than being accrued atthe outset.

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11. Items provided to the

operator by the grantorThe grantor may also provide the operator access to other items (for example, land or otherinfrastructure assets). Following the basic principles underlying the accounting model proposed in IFRIC12:11, infrastructure items to which the operator is given access by the grantor for the purposes of theservice arrangement are not recognised as property, plant and equipment of the operator because theyremain under the control of the grantor.Where an operator is given infrastructure items by the grantor as part of the consideration payableby the grantor for the services, to keep or deal with as the operator wishes (i.e., they are not for thepurposes of the service arrangement), then these assets are recognised as assets of the operator and aremeasured at fair value on initial recognition. The operator recognises a liability in respect of unfullledobligations it has assumed in exchange for the assets. The assets would not be viewed as governmentgrants as dened in IAS 20. [IFRIC 12:27]

Example 11.1Items provided to the operator by the grantorCompany A enters into a service concession arrangement in which it will build and operate a newhospital for a period of 30 years. In exchange, the government provides Company A with a xedannual cash payment, and title to a substantial plot of land surrounding the hospital. Company A isfree to use the land as it wishes. Company A should recognise the land as its own property at fairvalue at the date of initial recognition together with a corresponding obligation for any unfullledobligations.

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12. Disclosures about service

concession arrangementsSIC-29 Service Concession Arrangements: Disclosures species certain disclosures that are required forsuch service concession arrangements to meet the requirements of paragraph 112(c) of IAS 1(2007).This paragraph requires disclosures to provide additional information that is not presented in the primarynancial statements but is relevant to an understanding of them. The disclosure requirements apply to allservice concession arrangements, not just those within the scope of IFRIC 12.IFRIC 12 made the following consequential amendments to SIC-29: an additional requirement was added to disclose 'how the service arrangement has been classied';and an additional requirement was added to require an operator to disclose the amount of revenue andprots or losses recognised in the period on exchanging construction services for a nancial asset or anintangible asset.Examples of service concession arrangements given in SIC-29 are water treatment and supply facilities,motorways, car parks, tunnels, bridges, airports and telecommunications networks. SIC-29 also explainsthat outsourcing the operation of an entity's internal services (e.g. employee restaurant, buildingmaintenance, accounting or IT functions) are not service concession arrangements. [SIC-29:1]Certain aspects and disclosures relating to some service concession arrangements are addressed inother Standards. For example, IAS 16 would apply to property, plant and equipment used in a serviceconcession arrangement. However, SIC-29 points out that service concession arrangements may involveexecutory contracts that are not addressed in IFRSs, unless the contracts are onerous, in which case IAS37 applies. SIC-29, therefore, addresses additional disclosures that are relevant to service concessionarrangements. [SIC-29:5]

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All aspects of service concession arrangements should be considered in determining the appropriatedisclosure in the notes. An operator and a grantor should disclose the following in each period:[SIC-29:6] a description of the arrangement signicant terms of the arrangement that may affect the amount, timing and certainty of future cashows (e.g. the period of the concession, re-pricing dates and the basis upon which re-pricing orre-negotiation is determined); the nature and extent (e.g. quantity, time period or amount as appropriate) of: rights to use specied assets; obligations to provide or rights to expect provision of services; obligations to acquire or build items of property, plant and equipment; obligations to deliver or rights to receive specied assets at the end of the concession period; renewal and termination options; and other rights and obligations (e.g. major overhauls); changes in the arrangement occurring during the period; and how the service arrangement has been classied.In addition, an operator discloses the amount of revenue and prots or losses recognised in the period ofexchanging construction services for a nancial asset or an intangible asset. [SIC-29:6A]These disclosures are required to be provided individually for each service concession arrangement or inaggregate for each class of service concession arrangements. For this purpose, a class is a grouping ofservice concession arrangements involving services of a similar nature. For example, arrangements forwater treatment services could be treated as a class. [SIC-29:7]. However, where terms are signicantlydifferent (e.g. water treatment arrangements may have signicantly different terms in differentjurisdictions) the entity should consider the quality of the information being provided to users prior togrouping arrangements with dissimilar terms.

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13. Effective date and transition

IFRIC 12 applies for annual periods beginning on or after 1 January 2008, with earlier applicationpermitted. If an entity applies the Interpretation for a period beginning before 1 January 2008 that factmust be disclosed.The Interpretation should be applied retrospectively, in accordance with IAS 8. However, if it is notpracticable for an operator to apply the Interpretation retrospectively at the start of the earliest periodpresented it should:[IFRIC 12:30]a) recognise nancial assets and intangible assets that existed at the start of the earliest periodpresented;b) use the previous carrying amounts of those nancial and intangible assets (however previouslyclassied) as their carrying amounts as at that date; andc) test nancial and intangible assets recognised at that date for impairment, unless this is notpracticable, in which case the amounts should be tested for impairment as at the start of the currentperiod.

IFRS 1 First-time Adoption of International Financial Reporting Standards (Appendix D.22) states thatrst-time adopters may apply the transitional provisions in IFRIC 12. If retrospective application ofservice concession agreements prior to the date of transition to IFRS is impractical, an entity shoulduse the previous carrying amounts, however previously classied, as the carrying amounts as at thetransition date and classify the concession assets as nancial or intangible assets in accordance withIFRIC 12. [IFRIC 12:30 (b)]It is generally accepted that the reference to previous carrying amounts in IFRIC 12:30(b) should beinterpreted to mean previous GAAP carrying amounts, however classied under previous GAAP.

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Appendix List of the examples

includedThis guide provides preparers with an overview of IFRIC 12 as well as with guidance through examples asto how apply the requirements of the Interpretation and to answer the most frequently asked questionsby preparers.The following examples are included:Scope of IFRIC 12Example 2.1 Concession with unregulated prices and congestion paymentExample 2.2 Competitive tender processExample 2.3 Infrastructure used in a concession arrangement for its entire useful lifeExample 2.4 Indenite term of the concession arrangementExample 2.5 Application of IFRIC 12 when residual interest is returned to grantor at fair valueExample 2.6 Infrastructure with different activitiesThe accounting modelsExample 3.1.1 Recognition of a prot margin on construction work Infrastructure constructed by the operatorExample 3.1.2 Recognition of a prot margin on construction work Infrastructure acquiredExample 3.2.1 Examples of some typical concession mechanismsExample 3.2.2 Take-or-pay arrangementsExample 3.2.3 Payments for capacity availabilityExample 3.2.4 Guaranteed minimum revenue Guarantee of NPV of revenue with extension of concession termExample 3.2.5 Guaranteed minimum revenue Guarantee of NPV of revenue with limited extension of concession term andnal cashFinancial asset modelExample 4.1 Financial asset modelExample 4.2 Classication of income and expenseIntangible asset modelExample 5.1 Amortisation under intangible asset modelExample 5.2 Intangible asset modelBifurcated modelExample 6.1 Bifurcated modelMaintenance obligationsExample 7.1 Resurfacing obligations and changes in the estimates of the provisionItems provided to the operator by the grantorExample 11.1 Items provided to the operator by the grantor

Presentation and disclosure checklist

Checklist incorporating all of the presentation and disclosure requirements

6 th edition (June 2010). Guidance on how to apply these complex

Standards, including illustrative examples and interpretations.

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